PAYROLL PENALTIES AND CORRECTIONS

Payroll is one of the areas where the CRA applies penalties most strictly, because source deductions are money held in trust for employees and the government. For a sole proprietor, every penalty and every unremitted amount is a personal debt. This page sets out the main payroll penalties, how interest is charged, how to fix under-deductions, over-deductions and slip errors, and how to ask for penalties to be reduced. Remittance deadlines and frequencies are covered on the Payroll page.

LATE OR MISSED REMITTANCES

• 1 to 3 days late: 3% of the amount that was late.

• 4 or 5 days late: 5%.

• 6 or 7 days late: 7%.

• More than 7 days late, or not remitted: 10%.

• First $500: for a first failure in a calendar year, the penalty generally applies only to the part of the late amount over $500, unless the failure was deliberate.

• Repeat failures: a second or later failure in the same year that is made knowingly or through gross negligence can be penalized at 20%.

• Remitting to the wrong place: employers required to remit through a Canadian financial institution can be penalized for paying the CRA directly instead.

FAILING TO DEDUCT

• Penalty: 10% of the CPP, EI or income tax that should have been deducted from an employee's pay but was not.

• Repeat failures: 20% for a second or later failure in the same year made knowingly or through gross negligence.

• Still owed: the penalty is in addition to the amounts themselves. The employer must pay both the employer and employee shares of CPP and EI that were not deducted.

INTEREST

• Rate: the CRA's prescribed interest rate for overdue amounts, compounded daily, set each quarter.

• On what: unpaid remittances and unpaid penalties, from the day after the due date until payment.

• Not deductible: interest and penalties charged by the CRA are not deductible business expenses.

T4 SLIPS AND THE T4 SUMMARY

• Late filing: the penalty depends on how many slips are late and for how long. For 1 to 5 slips, it is $25 a day, with a minimum of $100 and a maximum of $2,500.

• Not giving slips to employees: a separate penalty can apply for each failure to give a copy to the employee by the deadline.

• Electronic filing: businesses filing more than five slips of a type in a calendar year must file them electronically. Filing on paper when electronic filing is required can be penalized.

FIXING UNDER-DEDUCTIONS

• Find it early: errors are often caught at year end when T4s are prepared, or by the CRA's Pensionable and Insurable Earnings Review (PIER), which compares the CPP and EI deducted with the earnings reported.

• Recovering the employee share: under-deducted CPP or EI can generally be recovered from the employee only by deducting it from later pay, within the time limits set by the CPP and EI rules. Amounts not recovered in time become the employer's cost.

• Income tax: income tax that was not withheld is not recovered by the employer; the employee pays it when filing their return, but the employer can still be penalized for failing to deduct.

• Correct the remittance: remit the shortfall as soon as it is found, to stop interest running.

FIXING OVER-DEDUCTIONS AND SLIP ERRORS

• During the year: adjust the next pay to refund the employee and reduce the following remittance.

• After year end: the employee recovers over-deducted CPP or EI through their tax return. The employer can request a refund of its own over-paid share using Form PD24, within four years for CPP and three years for EI.

• Amended T4s: file amended slips electronically with the corrected figures, and give the employee a copy marked as amended. Do not file a new original slip for the same employee.

• Overpaid wages: recovering wages paid in error from an employee is governed by provincial employment standards. Get the employee's written agreement before deducting an overpayment from later pay.

WORKED EXAMPLE

A proprietor's $3,000 monthly remittance is due on the 15th but paid on the 19th, the first late remittance of the year.

• Days late: four, so the 5% rate applies.

• Penalty: 5% × ($3,000 − $500) = $125, because the first $500 is excluded for a first failure.

• Interest: charged on the $3,000 for the four days, and on the penalty until it is paid.

ASKING FOR RELIEF

• Taxpayer relief: the CRA can cancel or reduce penalties and interest where the failure was caused by circumstances beyond the employer's control, such as serious illness, natural disaster or a CRA error. Requests are made on Form RC4288 within ten years of the end of the calendar year in question.

• Voluntary Disclosures Program: an employer who comes forward on their own to correct unreported or unremitted amounts, before the CRA starts any action, may get partial relief from penalties and interest.

• First-time errors: a clean compliance history and a prompt correction strengthen any request for relief.

KEY POINTS

• Remit on time: penalties start at 3% for a single day late and reach 10% after a week.

• Deduct correctly: failing to deduct costs 10% plus both shares of CPP and EI.

• Fix errors quickly: amended T4s, prompt shortfall payments and PD24 refunds for over-payments.

• Relief is possible: through taxpayer relief or voluntary disclosure, but not guaranteed.

SOURCES

• Canada Revenue Agency: Guide T4001, Employers' Guide, Payroll Deductions and Remittances (penalties, interest and other consequences).

• Canada Revenue Agency: Form PD24, Application for a Refund of Overdeducted CPP Contributions or EI Premiums; Form RC4288, Request for Taxpayer Relief.

• Income Tax Act: sections 227(8) and 227(9).